At the height of its influence in the late 60’s and early 70’s, Monetarism held that money expansion could have powerful short term effects on GDP and Employment. This appealed to policy makers since it offered a cheap way to manage the macro-economy and elevated Milton Friedman to rockstar status. Quite honestly, Friedman would have prefered to remain the academic, but being the father of Monetarism, he was forced into the grubby policy arena where he was called upon to prescribe miracle cures. Standing at the ‘kitchen sink’ of policymaking, he hatched ideas like ‘helicopter money’ as a kickstart for an economy in malaise.
Monetarism died because it’s logic was fatally flawed…its short term power was predicated on dumb, backward looking people. Once smart, forward looking people entered the theory, governments could no longer fool people into thinking that the helicopter drop made them any richer, and the whole short term ‘policy thing’ collapsed. To his credit, Friedman embraced the forward looking, rational expectations revolution and abandoned his belief in short term monetary stimulus. He went on to promote the need for micro-economic foundations of macro-economics until his death.
The current resurrection of Friedman’s helicopter money idea 40 years after Monetarism’s death is an outrage and, were he alive, Friedman himself would be the first to reject the idea. More insidiously, the school of economics that has grasped this idea is directly in conflict with the school that developed it! Policymakers are interventionists by nature, and typically associated with the left-wing of the economics field. Ironically, the left wing were vehemently opposed to ‘Chicago Monetarist dogma’ all those years ago, yet now are campaigning vigorously to let helicopter money take flight.
Philosophical differences aside, the bottom line is that the policy won’t work as evidenced by my favourite picture of the millenium – the decline in the velocity of circulation of money. The picture shows that the demand for money for transactions purposes has almost halved since peaking in 2007, and now stands at the same level as in 1975. Simply put, people don’t use money much any more. The various attempts at monetary stimulus since 2007 were simply treated with disdain by those smart, forward looking people who killed off Monetarism in the first place. These people didn’t buy the pea-and-thimble trick that the Fed (and the BoJ and the ECB and others) were attempting with QE, nor do they have much time for the negative interest rate sideshow. As for the manna from heaven that is about to be showered – well let’s just leave it on the ground to wash down the drains since it can’t be real, can it?